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Should a Plan Sponsor Adopt a 401k Investment Policy Statement?

Should a Plan Sponsor Adopt a 401k Investment Policy Statement?
December 03
00:03 2019

Now that you know what a 401k Investment Policy Statement (“IPS”) is (“What is a 401k Investment Policy Statement?FiduciaryNews.com, November 26, 2019), the next question is whether or not a 401k plan sponsor should adopt one. This has long been a contentious issue, but today we do seem to be converging on a consensus of sorts.

While it is by no means a universal truth, it is now commonly believed most 401k plan sponsors are better served by adopting an IPS. “The law does not require it, but it is a best practice not only for the plan but for the investment adviser as well because it lays out in writing a guideline for objective and constraints for both the plan sponsor and the investment professionals,” says Deborah A. Castellani, Sr. Fiduciary Strategist/Principal at Akros Fiduciary Management in Austin, Texas. “What we often tell plan sponsors is that how does the investment adviser know how to invest if you don’t give them something that helps them?”

Most speak of a 401k IPS in terms of what it provides to the plan sponsor in terms of the plan, but this interplay between the plan sponsor and the investment adviser. “A 401k IPS offers another layer of protection ensuring the portfolio is managed as agreed upon,” says Barry Mione, CEO of SaveDay in Austin, Texas. “Although the 401k IPS is not required by law to be provided to the end client, elements of the IPS are required to be disclosed in the Form ADV as well as in the Annual Disclosures Statement.”

Of course, while it isn’t legally required, the IPS does become a legal document. “The regulators routinely ask to see the written IPS,” says Castellani.

Because of this, whether a plan sponsor decides to adopt a 401k IPS remains an open question. It’s not a question that should be treated casually. Worse, plan sponsors can’t simply follow the crowd (either way) when making the decision. Every plan situation is different. Plan sponsors therefore must conduct a thorough due diligence to determine what’s best for their plan.

Marcia Wagner of the Wagner Law Group in Boston, Massachusetts, says, “If a plan sponsor does not believe that it will pay attention to and follow the terms of the IPS, then the decision not to adopt an IPS may be the correct one, because it is easier to defend a decision not to adopt an IPS than it is to adopt an IPS and not follow its terms, because it is one of the documents under which the plan is operated.”

So, what types of companies tend to avoid adopting a 401k IPS? That would be the companies that generally don’t have the staffing to ensure that everything outlined in a 401k IPS is precisely followed. “Smaller plans tend to implement an IPS less,” says Daniel Milan, managing partner of Cornerstone Financial Services in Southfield, Michigan.

But it doesn’t have to be that way. With the proper professional guidance, getting the wording right in an IPS can reduce the potential pitfalls.

“An IPS is a fiduciary best practice to keep the plan and the players involved in alignment,” says Greg Patterson, CEO of The Advisory Group in San Francisco, California. “The IPS must be done properly, clearly detailing the process the fiduciary follows and providing a solid framework for decision-making. It is essential to avoid the fiduciary trap of language that inadvertently makes it difficult or impossible to comply with policy that will lead to violations of policy.”

 

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Should a plan sponsor adopt a 401k investment policy statement? Yes. But not always.

Christopher Carosa is a keynote speaker, journalist, and the author of  401(k) Fiduciary SolutionsHey! What’s My Number? How to Improve the Odds You Will Retire in Comfort, From Cradle to Retirement: The Child IRA, and several other books on innovative retirement solutions, practical business tips, and the history of the wonderful Western New York region. Follow him on TwitterFacebook, and LinkedIn.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA

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